Mortgage borrowers know that they don't know much

Some recent industry-commissioned polls show that
consumers don't feel knowledgeable about home loans and they don't
know what to do if they fall behind on their monthly payments. Furthermore,
they view their homes as secure piggy banks -- a notion with some
merit, as long as they realize that loans against equity have to
be repaid with interest.

The most refreshing message coming out of these polls
is this: People are aware of their gaps in knowledge. What's less
clear is whether they know where to go to get the information they
need. They certainly aren't seeking advice from the debt-averse
generation that grew up during the Depression.

Blind to the options
In a survey conducted by Radian Guaranty, a mortgage insurance company,
52 percent of the homeowners said they didn't know much about the
mortgage options that were available when they bought their homes.

The question, "How much did you know about your
mortgage options" leaves a lot of room for interpretation,
but it's unambiguous that a lot of borrowers wish they had known
more when they signed on the dotted line.

Although they felt like they didn't know enough, these homeowners
weren't dummies. Homeowners were asked what two pieces of advice
they would give to prospective home buyers. More than half of the
respondents would tell home buyers to figure out how much house
they could afford. Another 45 percent would suggest that the buyer
find out about all the various mortgage options, and 36 percent
would recommend getting preapproved for a mortgage before looking
for a house.

That's the right idea, says Radian's executive vice
president for mortgage insurance, Mark Casale, in a press release.
"Certainly, having the foresight to get pre-approved will help
prospective buyers focus on the right price range."

Delinquent? Pick up the phone
While about half of home buyers say they didn't know about all of
their mortgage options, things are worse for those unfortunate homeowners
who fall at least a month behind on their payments. More than 60
percent of these delinquent borrowers don't know of the various
workout options that are available to them, according to a survey
commissioned by Freddie Mac, the mortgage funding giant.

People don't know their options because they don't call their
loan servicer. Three-quarters of delinquent borrowers recall being
contacted by their servicers. It's hard to forget those intimidating
collection calls. But fewer than half of the delinquent borrowers
ever contacted their lender. Presumably, they let the answering
machine pick up, and they never called back.

Bad move. Freddie Mac and rival Fannie Mae require
mortgage servicers to explore workout options with delinquent borrowers.
Sometimes something can be worked out, and sometimes it can't. But
if you have fallen behind by one or two months, it can't hurt
to call the company that collects the mortgage payments and see
if something can be worked out.

"That's the key thing," says Brad German,
spokesman for Freddie Mac. "How do we get more borrowers to
follow up on those opportunities, on those contacts?"

Reaching out earlier
The survey found that delinquent borrowers are eager to know of
their options when they are informed that they actually have options.
The mystery is how to convey this information to people who are
too anxious, frightened or embarrassed to call their lenders.

Freddie Mac is changing its guidelines to persuade loan servicers
to reach out earlier to delinquent borrowers, German says. Maybe
people will be more likely to explore their options when they're
one month late on their mortgage payments instead of two months
late.

Or maybe some folks will explore more exotic options,
such as catching up on late mortgage payments by borrowing against
the home's equity. Generally speaking, that would be a dumb thing
to do because it would mean swapping low-rate debt for higher-rate
debt. But you can't rule out that some people would do such a thing
in a moment of desperation after you read "Living
With Debt," a report written by Robert Manning, a professor
of finance at the Rochester Institute of Technology. Manning, a
critic of how debt is marketed to young people, is the author of
the book "Credit
Card Nation."

Manning's "Living With Debt" report, underwritten
by LendingTree.com, is ambitious (143 pages plus three appendixes)
and covers much more than merely mortgages. The project examines
peoples' attitudes about personal finance in six stages of life
-- college students, young singles, young families, mature families,
empty nesters and seniors.

Equity as comfort blanket
This might be oversimplifying, but Manning found that young singles
tend to want to buy a home first, then do long-term financial planning
afterward, and they say they will use home equity to bail themselves
out of any trouble. Manning quotes a 29-year-old named Jason as
saying, "the equity in my house provides a little comfort blanket,
and you definitely take that into consideration in your consumption
habits."

Translation: Eat, drink and be merry, for tomorrow
you may charge it to the home equity line of credit. OK, that's
a cheap shot, but there is some truth to it: Manning makes note
of what he calls "competitive consumption pressure." People
go into debt earlier in life, and they feel pressure to go further
into debt to keep up with their peers. For spring break, he says,
"people used to drive to Daytona Beach. Now they fly to Cancun,
because people have credit cards."

Manning says he was intrigued by the different attitudes
that people have about money depending on their stage in life and
by how rapid increases in home values have changed people's attitudes
about "good" and "bad" debts.

Regardless of age or life stage, consumers are still
coming to grips with what Manning calls the democratization of credit
-- the introduction of financial products that weren't widely available
a generation ago. Examples include piggyback mortgages, home equity
loans and home equity lines of credit. Young people aren't disposed
to seek their parents' advice about credit, and the parents are
just as confused about these new forms of debt as their children
are.

Education's the key
The need for consumer education underlies all three of these surveys:
Radian's, which found that homeowners wish they knew more about
mortgages; Freddie Mac's, which reported that delinquent borrowers
don't know their options, and LendingTree's, which uncovered confusion
about all kinds of debt.

Want to test your knowledge now? Bankrate has built
a five-question "Personal
finance quiz" that will tell you how much you know -- or
don't.

"We want to be the consumers' advocate and adviser,"
says Doug Lebda, chief executive of LendingTree. "We think
we're in a better position to do that the more we know about what
consumers need and want in the market."

That, he says, is why the company commissioned Manning's
report. It's the first part of a multiyear program to teach people
money-management skills.

No quick fixes
For his part, Manning has no quick solutions. He has helped develop
financial literacy programs for college students, and he concludes
his report by writing that "it's never been more important
for borrowers to arm themselves with knowledge and build sound financial-management
skills."

But getting consumers to arm themselves with knowledge is a difficult
task.

Radian's survey was conducted online by Harris Interactive.
It is a self-selected sample and so is not a random sample of Americans.
Freddie Mac's telephone poll was conducted by Roper among 2,031
homeowners age 18 and older. The margin of error of the total sample
is plus or minus 3 percentage points. Manning's study took the form
of questionnaires, interviews and focus group sessions involving
145 people in various stages of life in Rochester, N.Y.; Alexandria,
Va., and Orlando, Fla.